Payroll is a crucial task. If you have employees, they must be paid. Accidentally overpaying an employee is a common payroll error — and one of the most awkward. However, if you’re a small business owner, correcting an overpayment may be crucial to maintaining profitability.
Simply put, an overpayment is a type of payroll error. Payroll overpayments occur when someone’s paycheck has more money than they actually earned. These types of errors are surprisingly common, and are usually a result of human error or incorrect calculations.
Here’s a typical overpayment scenario: John is supposed to receive $20 per hour for a 40-hour workweek, totaling $800. However, a data entry errors accidentally lists John’s hourly rate as $25. John receives a paycheck for $1,000, or $200 than he actually earned. In this case, John has received an overpayment.
As a small business owner, what would you do in this scenario? Unless John comes forward and volunteers to give the money back, you’ve got a very awkward situation on your hands. And, while it’s legal for you to attempt overpayment collection, there is the potential for legal fallout (not to mention bad PR).
We’ve got some advice on the steps you need to take to correct payroll overpayment.
A not-so-fun fact: overpayments are one of the most common payroll errors. For context, the average company makes 15 payroll corrections per period. Here’s what to look for to prevent an overpayment from happening in the first place.
Complex pay structures make it more challenging to accurately calculate an employee's pay.
If an employee forgets to clock out at the end of their shift, the clock will keep running. If no one catches the missed punch, the employee will get paid for these hours, even though they weren’t working. Even worse, they might accumulate overtime pay for hours they never worked!
One way to avoid this is by choosing a web-based time clock with safeguards against missed punches. For example, OnTheClock can send reminders to employees when it’s time to punch out, as well as alerts for when overtime is about to begin. A good time clock will also allow you to easily correct errors as soon as you notice they’ve occurred.
Mistakes happen! Several factors can contribute to human error in the payroll process, leading to overpaid employees. Some examples include:
A lack of clear communication between departments can result in inaccurate payroll calculations. This can happen when there is no established system for sharing vital information, such as approved overtime hours or changes in employee schedules. Some common scenarios where miscommunication can lead to an employee overpayment include:
So, you accidentally overpaid an employee. They’ve cashed their paycheck, and the only way to recover your lost funds is to ask. What’s next?
The first thing you should do is ask yourself: is it worth it? Chances are, if you’re reading this, you have a good reason for wanting to recover the money. And if the overpayment is significant, you’ll definitely need to act fast.
But, before you do, put yourself in the payee’s shoes. Even though the overpayment is the result of an error, they may feel as though they’re being asked to pay their employer. And if the error isn’t their fault, they may even be angry about it.
So, before requesting repayment, consider whether the amount is going to have a significant impact on your profits. A disgruntled former employee can damage your business’s reputation, which may cost you much more in the long run.
If you decide that recollection is very important, know that, under federal law, you are legally entitled to recollect payroll overpayments. However, you still need to act carefully. Each state has a regulated protocol for recollecting overpayments, which you’ll need to follow to avoid a costly legal battle.
Before taking any action to correct overpaid wages, you’ll need to get your facts straight. It’s important to be able to actually prove that overpayment occurred.
Once you’ve documented the overpayment, you’ll need to make a plan for recollecting. That requires following both company policies and state overpayment laws.
For employers in the United States, the Department of Labor allows for you to recoup wage overpayments from employees, even if doing so brings their average payrate below minimum wage for their next paycheck. Additionally, many states regulate how overpayment may be deducted from a future paycheck.
If available, your human resources department or legal team can be great resources for guidance. Your company handbook may also outline a policy for correcting payroll errors. You can also do you own research on your state laws to make sure you’re compliant
When addressing the overpayment of wages, it’s best practice to notify the employee in writing. While having a heart-to-heart discussion may be a good place to start, you should follow up by providing notice in writing. There are several reasons for this.
When drafting the written notice, make sure to include:
To make it easy, here’s an example for a payroll overpayment letter. Note that this letter is just a sample to help you get started. Consult your local laws and obtain legal advice before attempting to recollect overpaid wages.
Dear [Employee’s Name],
I’m reaching out because of an unfortunate payroll error. While auditing our records, we discovered that, for the pay period of [Pay Period Dates], you were overpaid by [Dollar Amount].
After further review, we determined this overpayment error was caused by [reason]. While we take precautions to prevent these types of payroll mistakes, they still happen from time to time.
To ensure accuracy, the company needs to correct this overpayment. However, we are committed to working with you to make sure that this correction does not cause undue financial burden.
Let’s meet and come up with a plan that makes sense. Would [time] on [date] work for you?
Thanks!
[Your Name]
After you’ve informed your employee of the error, you’ll (hopefully) be able to work together to establish a repayment plan. Create a plan that is fair and manageable for both parties, and won’t place undue financial burden on your staff member.
Keep in mind that money is often an uncomfortable subject. Your employee may not want to be completely transparent about financial struggles or living expenses. When creating a plan, consider the following:
Possible repayment options include:
Once you and your employee come up with a plan, document it in writing. Provide a copy of this document to the employee. This will help to avoid misunderstandings and ensure both parties are aware of their obligations
After being sure to comply with state regulations and agreeing on a repayment plan with your employee, you’ll need to adjust your payroll records.
One essential step is addressing tax implications. Because overpayment can result in excess tax withholdings, you’ll need to adjust your tax liabilities. You may also need to file amended payroll tax forms with the appropriate agencies.
In some cases, you may decide that recollecting wages just isn’t an option. In that situation, you’ll have 2 options:
Only consider these options if it’s financially viable for your business, and if you believe it’s the right thing to do
Want to avoid recouping payment from an overpaid employee? If so, it’s best to implement some safeguards against the overpayment of wages before they have a chance to happen.
Again, the most common causes of overpayment are 1) complex pay scales, 2) missed clock-outs, 3) human error, and, 4) miscommunication. Using standardized pay rates and training your staff on payroll procedure can help.
Timekeeping software is one way to reduce the likelihood of overpaid wages. For example, a good web-based time clock like OnTheClock can make your payroll both streamlined and highly accurate.
Our time clock includes features like overtime alerts and punch reminders to reduce the occurrence of missed clock-outs. Still, mistakes can happen — which is why it’s easy to review and correct time card errors when they happen.
It’s also easy to export our time cards to payroll software used by small businesses. That means you confidently can complete payroll in just a few clicks.
Ready to give it a try?
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